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Israel Short-Term Bonds Drop on Bets Central Bank to Hold Rates

Israel’s short-term government bond yields rose to the highest level in more than a month amid speculation the central bank will leave borrowing costs tomorrow at the lowest level in a year.

The yield on the 4.5 percent notes due January 2015 climbed two basis points, or 0.02 percentage point, to 3.03 percent at the 4:30 p.m. close in Tel Aviv, the highest since Jan. 23. Shorter-term notes are typically more sensitive to rate fluctuations. The Bank of Israel will maintain the benchmark rate at 2.5 percent, according to all of 24 analysts in a Bloomberg survey.

“Yields on shorter-term bonds are rising as the market is pricing in that interest rates may hold this month on optimism the situation in Europe is getting under control,” said Dror Waserman, a bonds trader at Clal Finance Brokerage Ltd. in Tel Aviv. “The Bank of Israel is expected to pause on rates to reassess the impact of growth in Europe on the local economy.”

Euro-area finance ministers awarded 130 billion euros ($175 billion) in aid to Greece and reached an accord for greater debt relief from investor representatives in an exchange offer to tide the nation past a bond redemption next month. Exports make up about 40 percent of the Israeli economy and Europe is one of its largest markets.

Interest Rate Bets

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell one basis point to 2.47 percent on Feb. 24. The rate has advanced 13 basis points this month. The Bank of Israel’s monetary committee, led by Governor Stanley Fischer, lowered the benchmark lending rate to 2.5 percent on Jan. 23, the third cut in five months.

The one-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, fell four basis points to 261, implying an average annual inflation rate of 2.61 percent. The yield on the benchmark 5.5 percent bonds due January 2022 rose two basis point to 4.65 percent.

The economy expanded an annualized 3.2 percent in the fourth quarter compared with a revised 3.8 percent in the third quarter as exports and private consumption declined, the statistics bureau said Feb. 16. The central bank and the Finance Ministry reduced their growth predictions for this year on concern over the impact of Europe’s debt crisis.

Israeli funds raised 343 million shekels ($91 million) from investors in the week ended Feb. 23, Tel Aviv-based Meitav Investment House Ltd. said today. Government bond funds drew investments of 213 million shekels and corporate-bond funds raised 167 million shekels, while money market funds recorded redemptions.

The Tel-Bond 40 index of corporate bonds declined 0.3 percent to 263.18. The shekel weakened 0.7 percent to 3.7729 a dollar on Feb. 24.

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